2010 OASDI Trustees Report

The demographic and economic assumptions and methods described in the previous sections are used in a set of models to project future income and cost under the OASDI program. In some cases, the economic assumptions result in the direct calculation of program parameters as described in the following subsection. These parameters affect the level of payroll taxes collected and the level of benefits paid and are calculated using formulas described explicitly in the Social Security Act. In other cases, the combination of demographic and economic assumptions are used indirectly to drive more complicated models that project the numbers of future workers covered under OASDI and the levels of their covered earnings, as well as the numbers of future beneficiaries and the expected levels of their benefits. The following subsections provide brief descriptions of the derivations of these program-specific factors.

The Social Security Act specifies that certain program parameters affecting the determination of OASDI benefits and taxes are to be adjusted annually to reflect changes in particular economic measures. The law prescribes specific formulas that, when applied to reported statistics, produce automatic revisions in these program parameters and hence in the benefit and tax computations. These automatic adjustments are based on measured changes in the national average wage index (AWI) and the CPI.1 In this section, values are shown for program parameters that are subject to automatic adjustment, from the time that such adjustments became effective through 2019. Projected values for future years are based on the economic assumptions described in the preceding section of this report.

Tables V.C1 and V.C2 present the historical and projected values of the CPI-based benefit increases, as well as the AWI series and the values of many of the wage-indexed program parameters. In each table, the projections are shown under the three alternative sets of economic assumptions described in the previous section. Table V.C1 includes:

The annual levels of and percentage increases in the AWI. Under section 215(b)(3) of the Social Security Act, the AWI for each year after 1950 is used to index the taxable earnings of most workers first becoming eligible for benefits in 1979 or later. This procedure converts a worker’s past earnings to approximately equivalent values near the time of the worker’s benefit eligibility, and these indexed values are used to calculate the worker’s benefit amount. The AWI is also used to adjust most of the other program parameters that are subject to the automatic-adjustment provisions.

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The wage-indexed contribution and benefit base—the maximum amount of earnings for the specified year that are subject to the OASDI payroll tax and creditable toward benefit computation. The Social Security Act prohibits an increase in this base if there is no cost-of-living adjustment effective for December of the preceding year.

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The wage-indexed retirement earnings test exempt amounts — the annual amount of earnings below which beneficiaries are not subject to benefit withholding. A lower exempt amount applies in years before a beneficiary attains normal retirement age (NRA). A higher amount applies for the year in which the beneficiary attains NRA. The retirement test does not apply beginning with the attainment of NRA. The Social Security Act prohibits an increase in these exempt amounts if there is no cost-of-living adjustment effective for December of the preceding year.

Thebend points in the formula for computing the primary insurance amount (PIA) for workers who reach age 62, become disabled, or die in a given year. As illustrated in figure V.C1, these bend points indicate three ranges in a worker’s average indexed monthly earnings (AIME) over which a certain percent factor, 90, 32, or 15 percent, respectively, is applied to determine the worker’s PIA.

The old-law contribution and benefit base — the base that would have been in effect had the 1977 amendments not been enacted. This old-law base is used in determining special-minimum benefits for certain workers who have many years of low earnings in covered employment. Beginning in 1986, the old-law base is also used in the calculation of OASDI benefits for certain workers who are eligible to receive pensions based on noncovered employment. In addition, it is used for certain purposes under the Railroad Retirement program and the Employee Retirement Income Security Act of 1974.

Projections of the total labor force and unemployment rate (see Table V.B2) are based on Bureau of Labor Statistics definitions from the Current Population Survey (CPS), and thus represent the average weekly number of employed and unemployed persons, aged 16 and over, in the U.S. in a calendar year. Total covered workers in a year are the number of persons who have any OASDI covered earnings (subject to the OASDI payroll tax) at any time during the year. For those aged 16 and over, projected covered employment is the sum of age-sex components, each of which is projected as a ratio to the CPS concept of employment. For those under age 16, projected covered employment is the sum of age-sex components, each of which is projected as a ratio to the Social Security area population. The projection methodology accounts for changes in the business cycle, the quarterly pattern of growth in employment within each year, changes in non-OASDI covered employment, the increase in coverage of Federal civilian employment as a result of the 1983 Social Security Amendments, and changes in the number and employment status of other immigrants estimated to be residing within the Social Security coverage area.

Covered-worker rates are defined as the ratio of OASDI covered workers to the Social Security area population. The age-adjusted coverage rate for males age 16 and over is projected to be 71.3, 69.8, and 68.2 percent for 2084 for the low-cost, intermediate, and high-cost assumptions, respectively, compared to the 2008 level of about 70.6 percent. (Age-adjusted covered worker rates are adjusted to the 2008 age distribution of the Social Security area population.) For females, the projected age-adjusted coverage rate changes from 62.8 percent for 2008 to 64.7, 63.5, and 62.0 percent for 2084 for the low-cost, intermediate, and high-cost assumptions, respectively.

The OASDI taxable payroll (see Table VI.F6) is the amount of earnings in a year that, when multiplied by the combined employee-employer tax rate, yields the total amount of taxes due from wages and self-employed income in the year. Taxable payroll is used in estimating OASDI income and in determining income and cost rates and actuarial balances. (See section IV.B.1, Annual Income Rates, Cost Rates, and Balances, for definitions of these terms.) Taxable payroll is computed from taxable earnings, defined as the sum of wages and self-employment earnings subject to the Social Security tax. In computing taxable payroll, wages are adjusted to take into account the “excess wages” earned by workers with multiple jobs whose combined wages exceed the contribution and benefit base. In addition, from 1983 through 2001, taxable payroll includes deemed wage credits for military service. Prior to 1984, the self-employment tax rate was less than the combined employee-employer rate; thus taxable self-employment earnings were weighted to reflect this difference in tax rate. Also, prior to 1988, employers were exempt from paying Social Security tax on part of their employees’ tips; taxable payroll was thus reduced by half of the amount of tips to take this into account.

The computation of taxable earnings for employees, employers, and the self-employed is based on total earnings in covered employment. Covered earnings are summed from component sectors of the economy, including private, State and local, Federal civilian, and military. Covered earnings for each sector are based on the projected growth of U.S. earnings and a factor that reflects any projected change in coverage (e.g., the increase in coverage in the Federal civilian sector due to mandatory coverage of newly hired employees). The level of taxable earnings reflects only the portion of covered earnings that is at or below the contribution and benefit base. The portion of covered earnings that is taxable (i.e., at or below the base) was about 89.5, 86.8, and 82.8 percent for 1983, 1994, and 2000, respectively. This ratio of taxable earnings to covered earnings rose to about 85.8 for 2002, then fell in subsequent years to reach 82.3 for 2007. The average annual rate of change in the ratio was about -0.4 percent between 1983 and 2007. Most of this decline was due to a relative increase in wages for high earners.

The ratio rose to 83.5 percent for 2008 and further to 85.3 for 2009, largely due to a recession-induced reduction in the relative amount of wages of high earners. The taxable earnings ratio is projected to decline as the economy recovers, reaching levels for 2019 of 83.6, 82.8, and 82.1 percent for the low-cost, intermediate, and high-cost assumptions, respectively. After 2019, the taxable-to-covered earnings ratio is approximately constant.

Payroll tax revenue is computed by applying the scheduled tax rates to taxable wages and self-employment income, taking into account the lag between the time the tax liability is incurred and taxes are collected. In the case of wages, employers are required to deposit withholding taxes with the Treasury on a schedule determined by the amount of tax liability incurred. (Generally, the higher the amount of liability, the sooner the taxes must be paid—ranging from the middle of the following month for employers with few employees to the next banking day after wages are paid for companies with very large payrolls.) Self-employed workers are required to make estimated tax payments on their earnings four times during the year, as well as making up any under-estimate on their individual income tax return. The pattern of actual receipts by the Treasury is taken into account when estimating self-employed tax collections.

Eligibility for benefits under the OASDI program requires some minimal level of work in covered employment. This requirement is established by a worker’s accumulation of quarters of coverage (QCs). Prior to 1978, one QC was credited for each calendar quarter in which at least $50 was earned. In 1978, when annual earnings reporting replaced quarterly reporting, the amount required to earn a QC (up to a maximum of four per year) was set at $250. Since then, this amount has been adjusted each year according to changes in the AWI. Its value in 2010 is $1,120.

There are three types of insured status that can be acquired by a worker under the OASDI program. Each of these statuses is determined by the number and recency of QCs earned. Fully insured status is acquired by any worker whose total number of QCs is greater than or equal to the number of years elapsed after the year of attainment of age 21 (but not less than six). Once a worker has accumulated 40 QCs, he or she remains permanently fully insured. Disability insured status is acquired by any fully insured worker over age 30 who has accumulated 20 QCs during the 40-quarter period ending with the current quarter; any fully insured worker aged 24-30 who has accumulated QCs during one-half of the quarters elapsed after the quarter of attainment of age 21 and up to and including the current quarter; and any fully insured worker under age 24 who has accumulated six QCs during the 12-quarter period ending with the current quarter. Currently insured status is acquired by any worker who has accumulated six QCs during the 13-quarter period ending with the current quarter. Periods of disability are excluded from the above described QC requirements for insured status (but do not reduce the minimum of six QCs).

There are many types of benefits payable to workers and their family members under the OASDI program. A worker must be fully insured to be eligible for a primary retirement benefit and for his or her spouse or children to be eligible for auxiliary benefits. A deceased worker must have been either currently insured or fully insured at the time of death for his or her children (and their mother or father) to be eligible for benefits. If there are no eligible surviving children, the deceased worker must have been fully insured at the time of death for his or her surviving spouse to be eligible. A worker must be disability insured to be eligible for a primary disability benefit and for his or her spouse or children to be eligible for auxiliary benefits.

Historical estimates of the fully insured population, as a percentage of the Social Security area population, are made by age and sex for each birth cohort beginning with 1900. These percentages are based on 30,000 simulated work histories for each sex and birth cohort, which are constructed from past coverage rates, median earnings, and amounts required for crediting QCs. These work histories are developed in a model that assumes that persons who have recently been out of covered employment are likely to remain out of covered employment. This model is aligned such that the simulated fully insured percentages reproduce fairly closely the fully insured percentages estimated from the Continuous Work History Sample from 1970 to date. The fully insured population for future years is projected using this model, reflecting estimated future coverage rates, median earnings, and amounts required for crediting QCs.

Historical estimates of the disability insured population, as a percentage of the fully insured population, are made by age and sex for each birth cohort beginning with 1900. These percentages are based on the same simulated work histories used to project the fully insured percentages. Additional adjustments are made to bring the simulated disability insured percentages into close agreement with those estimated from the Continuous Work History Sample. The principal adjustment is for periods of disability (which are not explicitly taken into account in the model). These periods (which reduce the normally applicable QC requirements) have a negligible effect on fully insured status at retirement age, but a substantial effect on disability insured status. The disability insured population for future years is projected using this model, reflecting projections of the fully insured population.

Under this procedure, the percentage of the Social Security area population aged 62 and over that is fully insured is projected to increase from its estimated level of 82.5 for December 31, 2007, to 90.3, 90.0, and 89.8 for December 31, 2085, under alternatives I, II, and III, respectively. The percentage for females is projected to increase significantly, while that for males is projected to decline somewhat. Under alternative II, for example, the percentage for males is projected to decrease slightly during this period from 93.2 to 90.6, while that for females is projected to increase from 74.2 to 89.5.

For theshort-range period, the number of retired-worker beneficiaries is developed by applying award rates to the aged fully insured population less those insured persons entitled to retired-worker, disabled-worker, aged- widow(er)’s, or aged-spouse’s benefits, and by applying termination rates to the number of persons already receiving retired-worker benefits.

For the long-range period, the number of retired-worker beneficiaries not previously converted from disabled-worker beneficiary status is projected as a percentage of the exposed population, i.e., the aged fully insured population less persons entitled to or converted from disabled-worker benefits and fully insured persons entitled only to widow(er)’s benefits. For age 62, a linear regression is developed based on the historical relationship between this percentage and the labor force participation rate. The regression coefficients are then used to project this percentage based on the projected labor force participation rate for age 62. The percentage for ages 70 and over is assumed to be nearly 100, because delayed retirement credits cannot be earned after age 70. The percentage for each age 63 through 69 is projected based on historical experience with an adjustment for changes in the portion of the primary insurance amount that is payable at each age of entitlement. As the NRA increases, the number of retired-worker beneficiaries not automatically converted from disabled-worker beneficiary status as a percentage of the exposed population is gradually adjusted downward.

The number of aged-spouse beneficiaries (excluding those who are also receiving a retired-worker benefit) is estimated from the population projected by age and sex. The benefits of aged-spouse beneficiaries are based on the earnings records of their husbands or wives, who are referred to as “earners.” In the short-range period, insured aged-spouse beneficiaries are projected in conjunction with the retired-worker beneficiaries. Uninsured aged-spouse beneficiaries are projected by applying award rates to the aged uninsured male or female population and by applying termination rates to the population already receiving such benefits.

In the long-range period, aged-spouse beneficiaries are estimated separately for those married and divorced. The number of married aged-spouse beneficiaries is projected by applying a series of factors to the number of spouses aged 62 and over in the population. These factors represent the probabilities that the spouse and the earner meet all of the conditions of eligibility — i.e., the probabilities that (1) the earner is 62 or over, (2) the earner is insured, (3) the earner is receiving benefits, (4) the spouse is not receiving a benefit for the care of an entitled child, (5) the spouse is not insured, and (6) the spouse is not eligible to receive a significant government pension based on earnings in noncovered employment. To the resulting number of spouses a projected prevalence rate is applied to calculate the estimated number of aged-spouse beneficiaries.

The number of divorced aged-spouse beneficiaries is estimated by applying the same factors to the number of divorced persons aged 62 and over in the population, with three differences. First, an additional factor is required to reflect the probability that the person’s former earner spouse is still alive (otherwise, the person may be entitled to a divorced widow(er)’s benefit). Second, a factor is required to reflect the probability that the marriage to the earner spouse lasted at least 10 years. Third, factor (3) above is not applied because, effective January 1985, a divorced person is generally no longer required to wait to receive benefits until the former earner spouse is receiving benefits.

The projected numbers of children under age 18, and students aged 18 and 19, who are eligible for benefits as children of retired-worker beneficiaries, are based on the projected number of children in the population. In the short-range period, the number of entitled children is developed by applying award rates to the number of children in the population for whom both parents are alive, and by applying termination rates to the number of children already receiving benefits.

In the long-range period, the number of entitled children is projected separately by sex of the earner parent. The number of entitled children is projected for each age under 18 from the latest beneficiary data by reflecting changes in the number of children in the population and the ratio of retired workers aged 62 through 71 to the population aged 20 through 71. For student beneficiaries, factors are applied to the number of children aged 18 and 19 in the population, representing the probabilities that the parent is alive, aged 62 or over, insured, and receiving a retired-worker benefit. Another factor is applied representing the probability that the child is attending a secondary school.

The number of disabled children, aged 18 and over, of retired-worker beneficiaries is projected from the adult population. In the short-range period, award rates are applied to the population, and termination rates are applied to the number of disabled children already receiving benefits. In the long-range period, disabled children are projected in a manner similar to that for student children with the inclusion of a factor reflecting the probability of being disabled before age 22.

In the short-range period, the number of young spouses, entitled because they have a child in their care, is developed by applying award rates to the number of awards to children of retired workers, where the children are either under age 16 or disabled, and by applying termination rates to the number of young spouses with a child in care who are already receiving benefits. In the long-range period, young-spouse beneficiaries with a child in their care are projected as a proportion of the number of child beneficiaries of retired workers, taking into account projected changes in average family size.

The number of aged-widow(er) beneficiaries (excluding those who are also receiving a retired-worker benefit) is projected from the population by age and sex. In the short-range period, fully insured aged-widow(er) beneficiaries are projected in conjunction with the retired-worker beneficiaries. Uninsured aged-widow(er) beneficiaries are projected by applying award rates to the aged uninsured male or female population, and by applying termination rates to the population already receiving such benefits. In the long-range period, aged-widow(er) beneficiaries are projected by marital status. Four factors are applied to the number of widow(er)s in the population aged 60 and over. These factors represent the probabilities that (1) the deceased earner is fully insured at death, (2) the widow(er) is not receiving a benefit for the care of an entitled child, (3) the widow(er) is not fully insured, and (4) the widow(er)’s benefits are not withheld because of receipt of a significant government pension based on earnings in noncovered employment. In addition, some insured widow(er)s who had not applied for their retired-worker benefits are assumed to receive widow(er)’s benefits. Also, the same factors are applied to the number of divorced persons aged 60 and over in the population, with additional factors representing the probability that the person’s former earner spouse is deceased and that the marriage lasted at least 10 years.

In the short-range period, the number of disabled-widow(er) beneficiaries is developed by applying award rates to the uninsured male or female population and by applying termination rates to the population already receiving a disabled-widow(er) benefit. In the long-range period, the number is projected for each age from 50 to NRA as percentages of the widowed and divorced populations, adjusted for the insured status of the deceased spouse, the prevalence of disability, and the probability that the disabled spouse is not receiving another type of benefit.

The projected numbers of children under age 18, and students aged 18 and 19, who are entitled to benefits as survivors of deceased workers, are based on the projected number of children in the population whose mothers or fathers are deceased. In the short-range period, the number of entitled children is developed by applying award rates to the number of orphaned children and by applying termination rates to the number of children already receiving benefits.

The number of disabled-child-survivor beneficiaries, aged 18 and over, is projected from the adult population. In the short-range period, award rates are applied to the population, and termination rates are applied to the number of disabled-child-survivor beneficiaries already receiving benefits. In the long-range period, disabled-child-survivor beneficiaries are projected in a manner similar to that for student-child-survivor beneficiaries, with the inclusion of a factor reflecting the probability of being disabled before age 22.

In the short-range period, the numbers of entitled mother-survivor and father-survivor beneficiaries are developed by applying award rates to the number of awards to child-survivor beneficiaries, where the children are either under age 16 or disabled, and by applying termination rates to the number of mother-survivors and father-survivors already receiving benefits. In the long-range period, mother-survivor and father-survivor beneficiaries, assuming they are not remarried, are estimated from the number of child-survivor beneficiaries, taking into account projected changes in average family size.

Table V.C4 shows the projected number of beneficiaries under the OASI program by type of benefit. Included among the beneficiaries who receive retired-worker benefits are persons who also receive a residual benefit consisting of the excess of an auxiliary benefit over their retired-worker benefit. Estimates of the number and amount of such residual payments are made separately for spouses and widow(er)s.